Press Release No. 04/232

The following statement was issued today in Algiers:

"An International Monetary Fund mission led by Mr. Erik de Vrijer, has visited Algiers since October 6 to hold the annual discussions under Article IV of the Fund's Articles of Agreement. This review will result in the preparation of a report to be discussed by the Fund's Executive Board.

"The aim of this press conference is to share the results of these consultations with the Algerian people. The final consultation report will be published on the IMF website. It will be available, along with the previous years' reports, at the following internet address: www.imf.org/external/country/DZA/index.htm

"As is customary, the discussions covered recent developments and current economic policies, as well as the medium-term economic outlook. The mission was received by H.E. the Minister of Finance, Mr. Benachenhou, H.E. the Governor of the Bank of Algeria, Mr. Laksaci, and other members of the government and the National People's Assembly. The mission also met with representatives from the banking and business communities.

"The pick-up in growth in the last few years has led to a considerable drop in the unemployment rate. Boosted by the impact of the fiscal impulse on demand, as well as by the growth of hydrocarbon output, real GDP is expected to increase by approximately 5½ percent in 2004. In addition, the rise in the oil price on international markets has further strengthened Algeria's financial position in relation to the rest of the world. Early repayment of part of the foreign debt has substantially reduced the amount outstanding. The government's fiscal policy is expected to lead to an increase in the primary nonhydrocarbon budget deficit from an already high level of 29½ percent of nonhydrocarbon GDP (NHGDP) in 2003 to almost 32 percent in 2004. At the same time, the prudent monetary policy should limit inflation to 4 percent in 2004.

"Algeria is now in a good position to take decisive steps to determine its economic future. The favorable external environment and its strong financial position represent a confluence of factors that should be fully utilized to consolidate macroeconomic stability and to complete the economy's transition toward a market economy.

"The hydrocarbon wealth generates the means to strengthen the physical, institutional, and human capital needed for social and economic development. However, managing large foreign flows from hydrocarbon exports also presents a major challenge for macroeconomic policies. To meet this challenge, close coordination between fiscal and monetary policy is a prerequisite. Managing the hydrocarbon wealth must also take into account the need to reduce the vulnerability of government finances to oil price fluctuations; to ensure that hydrocarbon revenues are used transparently and efficiently; and to preserve part of the hydrocarbon wealth for future generations.

"The fiscal policy proposed in the draft 2005 budget law represents a turning point in the direction of government finances. With the control of public expenditure outlined in this draft law, the nonhydrocarbon primary deficit will gradually be reduced to a sustainable level. The fiscal adjustment planned by the government is also expected to lead to a better distribution of responsibilities between monetary and fiscal policies in controlling inflation.

"A larger role of the private sector in economic growth and the transition toward a market economy require the acceleration of structural and institutional reforms. In this regard, the mission is pleased with the government's five-year economic program. The reforms provided for in this program are essential to bring about sustainable growth and reduce the rate of unemployment, which remains high. The mission underscores the urgency of undertaking banking sector reform. It urges the authorities to intensify their efforts to rehabilitate financial relations among public banks and public enterprises, and to strengthen banking supervision considerably. In its view, the transfer of control of several public banks to reputable foreign banks is essential to inject fresh know-how into the Algerian marketplace.

"The trade liberalization undertaken by the government is key for Algeria's integration into the world economy. In this regard, it is essential to reduce tax exemptions substantially and to strengthen tax administration to mitigate the impact of the tariff reduction on budgetary revenues and to ensure tax equality. It would also be appropriate to accompany this opening up with greater regional cooperation."